TSC urges regulation of ‘Wild West’ crypto-assets
Written by Peter Walker
A report from the Treasury Select Committee has urged regulation needed for the ‘Wild West’ crypto-asset market, to tackle problems including volatile prices, hacking vulnerabilities, minimal consumer protection and anonymity aiding money laundering.
Crypto-assets, and most Initial Coin Offerings (ICO), are currently not within the scope of Financial Conduct Authority (FCA) regulation, read a statement. Crypto-asset investors are therefore currently afforded very little protection – namely there are no formal mechanisms for consumer redress, or compensation.
The committee noted that there are self-regulating bodies in the crypto-asset industry, which set out codes of conduct and best practice for the industry, but there are wholly voluntary. Inevitably, therefore, there are firms that will ignore them.
In May, one such body, CryptoUK, called on the committee to regulate the industry it represents.
“As the government and regulators decide whether the current Wild West situation is allowed to continue, or whether they are going to introduce regulation, consumers remain unprotected,” read the report. “The committee strongly believes that regulation should be introduced – at a minimum, regulation should address consumer protection and Anti-Money Laundering (AML).”
In deciding the regulatory approach, the committee suggested the government and regulators should evaluate the risks of crypto-assets, and assess whether their growth should be encouraged.
“If growth is favoured, regulation could lead to positive outcomes for the crypto-asset market, including the move toward a more mature business model and increased liquidity,” the statement continued, adding that if the UK develops a proportionate regulatory environment for crypto-assets, the UK could be well placed to become a global centre for this activity.
The committee argued that no cryptocurrencies perform the key currency functions of acting as a medium of exchange, a store of value, or a unit of account. “As cryptocurrencies are being used widely for speculation, well-functioning cryptocurrencies exist only as a theoretical concept.”
The report warned of crypto-assets being stolen from wallets and exchanges, and pointed to the lack of a collective deposit insurance scheme to compensate investors in the event of a hack as another serious risk. It added that there is no recourse for customers who have lost their password and are locked out of their account permanently.
The advertisements of both ICO issuers and crypto-asset exchanges are not regulated by the FCA, noted the report, criticising the misleading nature of some. “The regulator needs more power to control how crypto-asset exchanges and ICOs market their services,” it added.
Crypto-asset exchanges are also not currently included in AML regulations, meaning that they can facilitate the sale and purchase of illicit goods and services and can be used to launder the proceeds of crime.
This problem should be solved by the EU's fifth AML Directive, which will require crypto-asset exchanges to comply with AML regulations. However, the government’s consultation on transposing the directive into UK regulation is not expected to finish until the end of 2019.
The committee urged the government to prioritise and expedite the transposition.
Moving on to blockchain, the committee stated that “a fundamental drawback” is the slow, costly and energy-intensive verification process for transactions. “This may ultimately limit the extent to which crypto-assets and blockchain can replace conventional money and payment systems,” read the report. It did add that blockchain technology may have the potential to be a more efficient method of managing certain types of data in the long-term.
Nicky Morgan, chair of the committee, commented: “Given the high price volatility, the hacking vulnerability of exchanges and the potential role in money laundering, the committee strongly believes that regulation should be introduced.
“It's unsustainable for the government and regulators to bumble along issuing feeble warnings to potential investors, yet refrain from acting,” she added.
Earlier this year, evidence heard by the committee included experts dismissing cryptocurrencies as a fad compared to “pixie dust”, while others warned of getting sucked into the blockchain "hype cycle".